The UK government has announced that it now plans to introduce measures that will subject gains on the disposal of UK real estate to UK tax regardless of where the seller is resident. This brings the United Kingdom into line with the majority of jurisdictions. A consultation is being undertaken to determine the final detail of the measures but the following broad outline is available:
- Direct disposals of UK real estate will be subject to tax at UK corporation tax rates (currently 19 percent but due to reduce going forward). While some disposals may be subject to UK income tax rates, which are higher, it is likely that if the new measures pass, most taxpayers will restructure their real estate holding structure to fall within the corporation tax regime.
- The United Kingdom will also tax non-residents when they dispose of interests in land-rich companies.
- The stated aim of the policy behind the new rules is to subject all investors to UK tax, and it looks likely that exemptions will be limited.
- Non-UK investors in funds and certain UK structures are likely to be caught as well.
Further details of the measures are set out below.
Direct Disposals of UK Real Estate
With effect from April 2019, a gain realised on the sale of UK real estate will be subject to UK tax at the corporation rates (currently 19 percent but reducing to 17 percent in 2020) for corporate holders and 20 percent for individuals and certain collective holding structures. In general, no treaty protection is available for direct disposals of UK real estate. It is proposed that losses suffered on UK real estate disposals will be allowable against gains, and that the UK group regime, which allows companies to elect for gains and losses to be treated as arising to different members of the group, will be extended to apply to non-resident groups.
Indirect Disposals of UK Real Estate
A gain realised on the disposal of shares in a UK land-rich company may also be taxed under the new rules. Two conditions need to be met for a gain to be taxable:
- The company must be land rich. The UK proposes that a company whose value derives 75 percent or more from UK real estate will be treated as land rich for these purposes. The calculation will be based on gross asset values at the time of the disposal. Where the company disposed of is the holding company of a group, the UK land interests of all group members will be aggregated to determine whether the land-rich test is met.
- The seller must hold (or have held in the last five years) a 25 percent or more interest in the relevant company. Interests held by connected parties will be aggregated. In addition, where a number of investors act together (without being connected) in relation to an entity, they will be treated as connected.
Certain of the United Kingdom’s tax treaties would prevent an indirect charge. However, benefits under those treaties will generally not be available where the principal purpose of the corporate structure concerned is to take advantage of the treaty.
Rebasing
Only gains attributable to increases in value of real estate after 1 April 2019 will be caught. Asset values will, for tax purposes, be rebased to the fair market value of the asset on 1 April 2019
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Disclaimer:- The information contained herein is given by way of general guidance only and no action should be taken solely on the basis of the information contained herein. The Avanti Group (UK) Ltd will be pleased to provide further guidance on the issues, and how they might affect you. No liability is accepted by the firm for any action taken without seeking appropriate professional advice